C Labor Market Effects of the Affordable Care Act: Updated Estimates
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APPENDIX
2
C
Labor Market Effects of the
Affordable Care Act: Updated Estimates
Overview full effect and overall economic output nears its maxi-
The baseline economic projections developed by the mum sustainable level. CBO estimates that the ACA
Congressional Budget Office (CBO) incorporate the will reduce the total number of hours worked, on net,
agency’s estimates of the future effects of federal policies by about 1.5 percent to 2.0 percent during the period
under current law. The agency updates those projections from 2017 to 2024, almost entirely because workers will
regularly to account for new information and analysis choose to supply less labor—given the new taxes and
regarding federal fiscal policies and many other influences other incentives they will face and the financial benefits
on the economy. In preparing economic projections for some will receive. Because the largest declines in labor
the February 2014 baseline, CBO has updated its esti- supply will probably occur among lower-wage workers,
mates of the effects of the Affordable Care Act (ACA) on the reduction in aggregate compensation (wages, salaries,
labor markets.1 and fringe benefits) and the impact on the overall econ-
omy will be proportionally smaller than the reduction in
The ACA includes a range of provisions that will take full hours worked. Specifically, CBO estimates that the ACA
effect over the next several years and that will influence will cause a reduction of roughly 1 percent in aggregate
the supply of and demand for labor through various labor compensation over the 2017–2024 period, com-
channels. For example, some provisions will raise effective pared with what it would have been otherwise. Although
tax rates on earnings from labor and thus will reduce the such effects are likely to continue after 2024 (the end of
amount of labor that some workers choose to supply. In the current 10-year budget window), CBO has not esti-
particular, the health insurance subsidies that the act pro- mated their magnitude or duration over a longer period.
vides to some people will be phased out as their income
The reduction in CBO’s projections of hours worked
rises—creating an implicit tax on additional earnings—
represents a decline in the number of full-time-equivalent
whereas for other people, the act imposes higher taxes on
workers of about 2.0 million in 2017, rising to about
labor income directly. The ACA also will exert conflicting
2.5 million in 2024. Although CBO projects that total
pressures on the quantity of labor that employers
employment (and compensation) will increase over the
demand, primarily during the next few years.
coming decade, that increase will be smaller than it would
have been in the absence of the ACA. The decline in full-
How Much Will the ACA Reduce
time-equivalent employment stemming from the ACA
Employment in the Longer Term? will consist of some people not being employed at all and
The ACA’s largest impact on labor markets will probably
other people working fewer hours; however, CBO has not
occur after 2016, once its major provisions have taken tried to quantify those two components of the overall
effect. The estimated reduction stems almost entirely
1. As referred to in this report, the Affordable Care Act comprises from a net decline in the amount of labor that workers
the Patient Protection and Affordable Care Act (Public Law
111-148); the health care provisions of the Health Care and
choose to supply, rather than from a net drop in busi-
Education Reconciliation Act of 2010 (P.L. 111-152); and the nesses’ demand for labor, so it will appear almost entirely
effects of subsequent judicial decisions, statutory changes, and as a reduction in labor force participation and in hours
administrative actions. worked relative to what would have occurred otherwise
CBO118 THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 FEBRUARY 2014
rather than as an increase in unemployment (that is, more people will be applying for each available job—meaning
workers seeking but not finding jobs) or underemploy- that if some people seek to work less, other applicants will
ment (such as part-time workers who would prefer to be readily available to fill those positions and the overall
work more hours per week). effect on employment will be muted. Third, the ACA’s
subsidies for health insurance will both stimulate demand
CBO’s estimate that the ACA will reduce employment for health care services and allow low-income households
reflects some of the inherent trade-offs involved in to redirect some of the funds that they would have spent
designing such legislation. Subsidies that help lower- on that care toward the purchase of other goods and ser-
income people purchase an expensive product like vices—thereby increasing overall demand. That increase
health insurance must be relatively large to encourage a in overall demand while the economy remains somewhat
significant proportion of eligible people to enroll. If those weak will induce some employers to hire more workers or
subsidies are phased out with rising income in order to to increase the hours of current employees during that
limit their total costs, the phaseout effectively raises peo- period.
ple’s marginal tax rates (the tax rates applying to their
last dollar of income), thus discouraging work. In addi- Why Does CBO Estimate Larger Reductions
tion, if the subsidies are financed at least in part by higher Than It Did in 2010?
taxes, those taxes will further discourage work or create In 2010, CBO estimated that the ACA, on net, would
other economic distortions, depending on how the taxes reduce the amount of labor used in the economy by
are designed. Alternatively, if subsidies are not phased out roughly half a percent—primarily by reducing the
or eliminated with rising income, then the increase in amount of labor that workers choose to supply.2 That
taxes required to finance the subsidies would be much measure of labor use was calculated in dollar terms,
larger. representing the approximate change in aggregate labor
compensation that would result. Hence, that estimate
CBO’s estimate of the ACA’s impact on labor markets is can be compared with the roughly 1 percent reduction in
subject to substantial uncertainty, which arises in part aggregate compensation that CBO now estimates to
because many of the ACA’s provisions have never been result from the act. There are several reasons for that
implemented on such a broad scale and in part because difference: CBO has now incorporated into its analysis
available estimates of many key responses vary consider- additional channels through which the ACA will affect
ably. CBO seeks to provide estimates that lie in the labor supply, reviewed new research about those effects,
middle of the distribution of potential outcomes, but and revised upward its estimates of the responsiveness of
the actual effects could differ notably from those esti- labor supply to changes in tax rates.
mates. For example, if fewer people obtain subsidized
insurance coverage through exchanges than CBO expects,
then the effects of the ACA on employment would be Effects of the ACA on the
smaller than CBO estimates in this report. Alternatively, Supply of Labor
if more people obtain subsidized coverage through CBO anticipates that the ACA will lead to a net reduc-
exchanges, then the impact on the labor market would tion in the supply of labor. In the agency’s judgment,
be larger. the effects will be most evident in some segments of
the workforce and will be small or negligible for most
Why Will Those Reductions Be Smaller in the categories of workers. (The ACA also will slightly affect
Short Term? employers’ demand for labor, as discussed below, and the
CBO estimates that the ACA will cause smaller declines total effect on labor use will consist of the combined
in employment over the 2014–2016 period than in later effects on supply and on demand.) In CBO’s view, the
years, for three reasons. First, fewer people will receive ACA’s effects on labor supply will stem mainly from
subsidies through health insurance exchanges in that the following provisions, roughly in order of importance:
period, so fewer people will face the implicit tax that
results when higher earnings reduce those subsidies. 2. See Congressional Budget Office, The Budget and Economic
Second, CBO expects the unemployment rate to remain Outlook: An Update (August 2010), Box 2-1, www.cbo.gov/
higher than normal over the next few years, so more publication/21670.
CBOAPPENDIX C THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 119
The subsidies for health insurance purchased through income thus raises the enrollee premium (and reduces
exchanges; the subsidy) both because the percentage-of-income for-
mula applies to a larger dollar amount and because that
The expansion of eligibility for Medicaid; percentage itself increases. People whose income exceeds
400 percent of the FPL are ineligible for premium sub-
The penalties on employers that decline to offer sidies, and for some people those subsidies will drop
insurance; and abruptly to zero when income crosses that threshold.
Cost-sharing subsidies also phase out in steps with rising
The new taxes imposed on labor income. income, declining sharply at 150 percent, 200 percent,
and 250 percent of the FPL.
Some of those provisions will reduce the amount of
labor supplied by some workers; other provisions will CBO’s estimate of the impact that the subsidies will have
increase the amount of labor supplied by other workers. on labor supply has three components: the magnitude of
Several provisions also will combine to affect retirement the incentive, the number and types of people affected,
decisions. and the degree of responsiveness to the incentive among
those who are affected.
The ACA also could alter labor productivity—the
amount of output generated per hour of work—which The Magnitude of the Incentive to Reduce Labor Supply.
in turn would influence employment (for example, by For some people, the availability of exchange subsidies
affecting workers’ health or firms’ investments in training under the ACA will reduce incentives to work both
of workers). The effects on productivity could be positive through a substitution effect and through an income
or negative, however, and their net impact is uncertain, so effect. The former arises because subsidies decline with
they are not reflected in CBO’s estimates of labor supply rising income (and increase as income falls), thus making
or demand. Because the ACA could affect labor markets work less attractive. As a result, some people will choose
through many channels, with substantial uncertainty not to work or will work less—thus substituting other
surrounding the magnitude of the effects and their inter- activities for work. The income effect arises because
actions, CBO has chosen not to report specific estimates subsidies increase available resources—similar to giving
for each of the channels encompassed by its analysis. people greater income—thereby allowing some people to
maintain the same standard of living while working less.
Effects of Insurance Subsidies on the The magnitude of the incentive to reduce labor supply
Supply of Labor thus depends on the size of the subsidies and the rate at
Beginning in 2014, many people who purchase insurance which they are phased out.
through exchanges will be eligible for federal tax credits
to defray the cost of their premiums, and some also will The Number and Types of Workers Likely To Be Affected.
be eligible for cost-sharing subsidies to reduce out-of- Subsidies clearly alter recipients’ incentives to work and
pocket expenditures for health care. Those subsidies are can certainly influence the labor supply of those who
largest for people whose income is near the federal pov- would gain eligibility by working and earning slightly
erty guideline (also known as the federal poverty level, less. But most full-time workers do not confront that
or FPL), and they decline with rising income.3 particular choice—either their income is well above
400 percent of the FPL or they are offered employment-
In 2014, for example, a single person or a family whose based health insurance and thus are generally ineligible
income is 150 percent of the FPL and is eligible for for subsidies regardless of their income. Even so, one line
subsidies will pay 4 percent of their income for a certain of research indicates that the subsidies will affect the labor
“silver” health care plan purchased through an exchange; supply of many full-time workers with health insurance
if their income is 200 percent of the FPL, they will pay
6.3 percent of their income for that plan.4 An increase in
4. A silver plan pays about 70 percent of covered health costs, on
average. For the second-least-expensive silver plan offered on the
3. In 2013, the FPL (which is indexed to inflation) was $11,490 for exchanges, the premium, net of subsidies, for a family of four in
a single person and $23,550 for a family of four. Calculations of 2014 would be $1,413 at 150 percent of the FPL ($35,325) but
exchange subsidies for 2014 use the 2013 FPL schedule. would rise to $2,967 at 200 percent of the FPL ($47,100).
CBO120 THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 FEBRUARY 2014
from their employer—precisely because they effectively those workers to lengthen the time they are out of
forgo exchange subsidies when they take or keep a job work—similar to the effect of unemployment benefits.
with health insurance.5 If instead a worker switched to a
part-time job, which typically does not offer health insur- Responsiveness of Affected Groups. The implicit taxes
ance, that worker could become eligible for exchange that arise from the phaseout of the subsidies have effects
subsidies. In that view, exchange subsidies effectively on net income that are similar to the effects of direct
constitute a tax on labor supply for a broad range of taxes. With tax changes, however, the income and sub-
workers. stitution effects typically work in opposite directions,
whereas with the insurance subsidies the income and
In CBO’s judgment, however, the cost of forgoing substitution effects work in the same direction to decrease
exchange subsidies operates primarily as an implicit tax labor supply.7 CBO’s estimate of the response of labor
on employment-based insurance, which does not imply a supply to the subsidies is based on research concerning
change in hours worked. Instead, the tax can be avoided
the way changes in marginal tax rates affect labor supply
if a worker switches to a different full-time job without
and on studies analyzing how labor supply responds to
health insurance (or possibly two part-time jobs) or if the
changes in after-tax income.8
employer decides to stop offering that benefit. The conse-
quences of that implicit tax are incorporated into CBO’s Effects of the Medicaid Expansion on Labor Supply
estimate of the ACA’s effect on employment-based cover- The ACA significantly increases eligibility for Medicaid
age—which is projected to decline, on net, by about
for residents of states that choose to expand their pro-
4 percent because of the ACA (see Appendix B).6
grams. In states that adopt the expansion, Medicaid
Correspondingly, the negative effects of exchange subsi-
eligibility is extended to most nonelderly residents
dies on incentives to work will be relevant primarily for a
whose income is below 138 percent of the FPL—includ-
limited segment of the population—mostly people who
ing childless adults who previously were ineligible for
have no offer of employment-based coverage and whose
income is either below or near 400 percent of the FPL. Medicaid in most states regardless of their income. In
states that have not expanded Medicaid, people whose
Nonetheless, another subgroup that has employment- income is between 100 percent and 138 percent of the
based insurance does seem likely to reduce their labor FPL become eligible for subsidies through the exchanges;
supply somewhat. Specifically, those people whose in those states, subsidies could decline abruptly if an
income would make them eligible for subsidies through enrollee’s income fell from just above the FPL to just
exchanges (or for Medicaid), and who work less than a below it (and vice versa). By 2018, CBO expects that
full year (roughly 10 to 15 percent of workers in that around 80 percent of the potentially eligible population
income range in a typical year), would tend to work will live in states that have expanded Medicaid.
somewhat less because of the ACA’s subsidies. For those
workers, the loss of subsidies upon returning to a job with 7. To see how the substitution and income effects can create
health insurance is an implicit tax on working (and is counteracting pressures on people’s willingness to work when tax
equivalent to an average tax rate of roughly 15 percent, rates change, consider the case of an increase in tax rates. The
resulting reduction in take-home pay for an additional hour of
CBO estimates). That implicit tax will cause some of
work makes work less valuable relative to other uses of time and
encourages people to work less. Reduced after-tax income from a
5. See Casey B. Mulligan, Average Marginal Tax Rates Under the given amount of work, however, encourages people to work more
Affordable Care Act, Working Paper 19365 (National Bureau of to limit the decline in their standard of living.
Economic Research, August 2013), www.nber.org/papers/
8. See Congressional Budget Office, How the Supply of Labor
w19365, and Is the Affordable Care Act Different From Romneycare?
Responds to Changes in Fiscal Policy (October 2012), www.cbo.gov/
A Labor Economics Perspective, Working Paper 19366 (National
publication/43674; Robert McClelland and Shannon Mok, A
Bureau of Economic Research, August 2013), www.nber.org/
Review of Recent Research on Labor Supply Elasticities, Working
papers/w19366.
Paper 2012-12 (Congressional Budget Office, October 2012),
6. See Congressional Budget Office, CBO and JCT’s Estimates of the www.cbo.gov/publication/43675; and Felix Reichling and Charles
Effects of the Affordable Care Act on the Number of People Obtaining Whalen, Review of Estimates of the Frisch Elasticity of Labor Supply,
Employment-Based Health Insurance (March 2012), www.cbo.gov/ Working Paper 2012-13 (Congressional Budget Office, October
publication/43082. 2012), www.cbo.gov/publication/43676.
CBOAPPENDIX C THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 121
Incentives to Change Labor Supply and Groups Affected. Responses of Affected Groups. A number of studies
For some people, the ACA’s expansion of Medicaid will examining the impact of changes in Medicaid eligibility
reduce the incentive to work—but among other people it for parents and children have shown either no effects or
will increase that incentive. As with exchange subsidies, small effects on the labor supply of single mothers; effects
access to Medicaid confers financial benefits that are on two-parent households appear to be somewhat larger,
phased out with rising income or (more commonly) elim- in part because health insurance has stronger effects on
inated when income exceeds a threshold; some people the labor supply of secondary earners.9
will thus work fewer hours or withdraw from the labor
force to become or remain eligible (the substitution More recently, several studies have examined changes in
effect). Moreover, those financial benefits will lead some state policies that affect childless adults—who constitute
people to work less because the increase in their available the majority of those gaining coverage through the Med-
resources enables them to reduce work without a decline icaid expansion—and larger effects have been reported.
in their standard of living (the income effect). Some reductions in employment are reported among
people who have gained Medicaid eligibility, although the
At the same time, some people who would have been findings differ regarding the magnitude and statistical sig-
eligible for Medicaid under prior law—in particular, nificance of that effect.10 Similarly, other research shows
working parents with very low income—will work more a rise in employment rates with the withdrawal of Medic-
as a result of the ACA’s provisions. In 2013, the median aid coverage from childless adults who had previously
income threshold for that group’s Medicaid eligibility was been turned down for private insurance.11 Because those
64 percent of the FPL (albeit with substantial state-to- studies examined state-level policy initiatives affecting
state variation). The incentives and groups affected program eligibility—instead of changes in eligibility
depend on whether a state has adopted the Medicaid attributable to income changes, which could merely
expansion (and, in both cases, those incentives are inter- reflect changes in employment—the results provide some
twined with the effects of the exchange subsidies): useful insights into the potential effects of the ACA (even
though other aspects of the studies raise questions about
In states that have chosen to expand Medicaid, the their applicability to an analysis of the ACA).
ACA now allows parents to qualify for Medicaid with
income up to 138 percent of the FPL. And if their Taking that research into account, CBO estimates that
income rises above that threshold, those parents would expanded Medicaid eligibility under the ACA will, on
generally be eligible for premium tax credits and cost- balance, reduce incentives to work. That effect has a rela-
sharing subsidies for insurance purchased through tively modest influence on total labor supply, however,
the exchanges unless they are offered qualified because the expansion of eligibility for Medicaid
employment-based health insurance. The subsidies primarily affects a relatively small segment of the total
will cover a smaller share of enrollees’ medical costs population—both because most people’s income will
than Medicaid would, but under prior law those
participants ultimately would have become ineligible 9. See Jonathan Gruber and Brigitte C. Madrian, Health Insurance,
for Medicaid and lost all benefits. As a result, some Labor Supply, and Job Mobility: A Critical Review of the Literature,
people who would have curtailed their hours of work Working Paper 8817 (National Bureau of Economic Research,
in order to maintain access to Medicaid under prior February 2002), www.nber.org/papers/w8817.
law will now be able to increase their hours and 10. See Katherine Baicker and others, The Impact of Medicaid on
income while remaining eligible for subsidized Labor Force Activity and Program Participation: Evidence from the
insurance. Oregon Health Insurance Experiment, Working Paper 19547
(National Bureau of Economic Research, October 2013),
www.nber.org/papers/w19547; and Laura Dague, Thomas
In states that choose not to expand Medicaid, the
DeLeire, and Lindsey Leininger, “The Effect of Public Insurance
availability of exchange subsidies also will lead some Coverage for Childless Adults on Labor Supply” (draft, March
people to work more. Specifically, some people who 2013), www.uh.edu/~achin/conference/dague.pdf (950 KB).
would otherwise have income below the FPL will 11. Craig Garthwaite, Tal Gross, and Matthew J. Notowidigdo, Public
work more so that they can qualify for the substantial Health Insurance, Labor Supply, and Employment Lock, Working
exchange subsidies that become available when Paper 19220 (National Bureau of Economic Research, July 2013),
income is equal to or just above the FPL www.nber.org/papers/w19220.
CBO122 THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 FEBRUARY 2014
significantly exceed the cutoff for Medicaid eligibility and the decline in after-tax hourly compensation also will
because some low-income people live in states that are reduce the return on each additional hour of work, thus
not expected to expand Medicaid. tending to reduce the incentive to work. On net, CBO
anticipates, the second effect will be larger than the
Effects of the Employer Penalty on Labor Supply first, and the tax will yield a small net reduction in labor
Under the ACA, employers with 50 or more full-time- supply.
equivalent employees will face a penalty if they do not
offer insurance (or if the insurance they offer does In addition, beginning in 2018, the ACA imposes an
not meet certain criteria) and if at least one of their full- excise tax on certain high-cost health insurance plans.
time workers receives a subsidy through an exchange. CBO expects that the burden of that tax will, over time,
Originally scheduled to take effect in 2014, that penalty be borne primarily by workers in the form of smaller
is now scheduled to be enforced beginning in 2015. In after-tax compensation. Some firms may seek to avoid or
CBO’s judgment, the costs of the penalty eventually will limit the amount of the excise tax they pay by switching
be borne primarily by workers in the form of reductions to less expensive health plans, and in that case workers’
in wages or other compensation—just as the costs of a wages should rise by a corresponding amount. Those
payroll tax levied on employers will generally be passed wages will be subject to income and payroll taxes, how-
along to employees.12 Because the supply of labor is ever, so total tax payments by those workers will be higher
responsive to changes in compensation, the employer than they would have been in the absence of the ACA.
penalty will ultimately induce some workers to supply After-tax compensation will thus fall whether firms pay
less labor. the excise tax or take steps to avoid it, and the resulting
increases in average and marginal tax rates will cause a
In the next few years, however, when wages probably will slight decline in the supply of labor, CBO estimates.
not adjust fully, those penalties will tend to reduce the
demand for labor more than the supply. In the longer Under certain circumstances, the ACA also imposes a
run, some businesses also may decide to reduce their penalty tax on people who do not have qualified health
hiring or shift their demand toward part-time hiring— insurance. That tax is to be phased in over time; by 2016,
either to stay below the threshold of 50 full-time- it will generally be the greater of $695 annually per adult
equivalent workers or to limit the number of full-time or 2.5 percent of taxable income (each subject to a cap).15
workers that generate penalty payments. But such shifts For people who are subject to the percentage-of-income
might not reduce the overall use of labor, as discussed penalty, that tax discourages work—but CBO estimates
below.
13. CBO and the staff of the Joint Committee on Taxation have
estimated that, on balance, the ACA will reduce the cumulative
Effects of Higher Marginal Tax Rates on
deficit over the 2013–2022 period because cuts in other spending
Labor Supply more than offset the rest of the cost of the expansion in coverage.
To cover part of the cost of the expansion of coverage, the Therefore, repealing the ACA would increase budget deficits by a
ACA also imposes higher taxes on some people.13 In par- corresponding amount over that period; see Congressional Budget
ticular, the payroll tax for Medicare’s Hospital Insurance Office, letter to the Honorable John Boehner providing an
estimate for H.R. 6079, the Repeal of Obamacare Act (July 24,
program has increased by 0.9 percentage points for work- 2012), www.cbo.gov/publication/43471.
ers whose earnings are above $200,000 ($250,000 for
those filing a joint return).14 As with other tax increases, 14. The ACA has also raised the tax rate on capital income for some
higher-income households and imposed taxes on certain goods
those changes will exert competing pressures on labor and services (such as medical devices), but CBO does not expect
supply: Lower after-tax compensation will encourage those provisions to have a noticeable effect on the overall labor
people to work more to make up for the lost income, but market.
15. For families who are subject to the dollar penalty, the penalty per
12. By contrast, if employers add health insurance coverage as a child is one-half the adult penalty, and in 2016 the payment is
benefit in response to the penalty or drop coverage despite it, capped at $2,085; for people who are subject to the percentage-of-
CBO estimates that their workers’ wages will adjust by roughly income penalty, the tax payment is capped at the average cost of a
the employers’ cost of providing that coverage—so total “bronze” insurance plan (which, on average, covers 60 percent of
compensation would stay about the same and labor supply would enrollees’ health costs) offered through the exchanges. After 2016,
not be affected by the change in employer coverage. the dollar penalty is indexed to general inflation.
CBOAPPENDIX C THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 123
that a relatively small number of workers will be affected. Possible Effects on Labor Supply
About 6 million workers and dependents will be subject Through Productivity
to the penalty tax in 2016, and among the workers who In addition to the effects discussed above, the ACA could
pay it, a large share will be subject to the dollar penalty shape the labor market or the operations of the health
rather than the percentage-of-income penalty.16 As a sector in ways that affect labor productivity. For example,
result, CBO estimates that its impact on aggregate labor to the extent that increases in insurance coverage lead to
supply will be negligible. improved health among workers, labor productivity
could be enhanced. In addition, the ACA could influence
Effects on Retirement Decisions and labor productivity indirectly by making it easier for some
Disabled Workers employees to obtain health insurance outside the work-
Changes to the health insurance market under the ACA, place and thereby prompting those workers to take jobs
that better match their skills, regardless of whether those
including provisions that prohibit insurers from denying
jobs offered employment-based insurance.
coverage to people with preexisting conditions and those
that restrict variability in premiums on the basis of age or Some employers, however, might invest less in their
health status, will lower the cost of health insurance plans workers—by reducing training, for example—if the
offered to older workers outside the workplace. As a turnover of employees increased because their health
result, some will choose to retire earlier than they other- insurance was no longer tied so closely to their jobs.
wise would—another channel through which the ACA Furthermore, productivity could be reduced if businesses
will reduce the supply of labor. shifted toward hiring more part-time employees to avoid
paying the employer penalty and if part-time workers
The new insurance rules and wider availability of subsi- operated less efficiently than full-time workers did. (If
dies also could affect the employment decisions of people the dollar loss in productivity exceeded the cost of the
with disabilities, but the net impact on their labor supply employer penalty, however, businesses might not shift
is not clear. In the absence of the ACA, some workers toward hiring more part-time employees.)
with disabilities would leave the workforce to enroll in
such programs as Disability Insurance (DI) or Supple- Whether any of those changes would have a noticeable
influence on overall economic productivity, however, is
mental Security Income (SSI) and receive subsidized
not clear. Moreover, those changes are difficult to quan-
health insurance. (SSI enrollees also receive Medicaid;
tify and they influence labor productivity in opposing
DI enrollees become eligible for Medicare after a two- directions. As a result, their effects are not incorporated
year waiting period.) Under the ACA, however, they into CBO’s estimates of the effects of the ACA on the
could be eligible for subsidized health insurance offered labor market.
through the exchanges, and they cannot be denied cover-
age or charged higher premiums because of health Some recent analyses also have suggested that the ACA
problems. As a result, some disabled workers who would will lead to higher productivity in the health care sec-
otherwise have been out of the workforce might stay tor—in particular, by avoiding costs for low-value health
employed or seek employment. At the same time, those care services—and thus to slower growth in health care
subsidies and new insurance rules might lead other dis- costs under employment-based health plans.17 Slower
abled workers to leave the workforce earlier than they growth in those costs would effectively increase workers’
otherwise would. Unlike DI applicants who are ineligible compensation, making work more attractive. Those
effects could increase the supply of labor (and could
for SSI, they would not have to wait two years before they
increase the demand for labor in the near term, if some of
received the ACA’s Medicaid benefits or exchange subsi-
the savings were not immediately passed on to workers).
dies—making it more attractive to leave the labor force
and apply for DI.
17. See Council of Economic Advisers, Trends in Health Care Cost
Growth and the Role of the Affordable Care Act (November 2013),
16. See Congressional Budget Office, Payments of Penalties for Being http://go.usa.gov/ZJFJ; and David Cutler and Neeraj Sooj, New
Uninsured Under the Affordable Care Act (September 2012), Jobs Through Better Health Care (Center for American Progress,
www.cbo.gov/publication/43628. January 2010), http://tinyurl.com/oc2zdta.
CBO124 THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 FEBRUARY 2014
Whether the ACA already has or will reduce health care reduce labor supply and will lower employment slightly
costs in the private sector, however, is hard to determine. through that channel.
The ACA’s reductions in payment rates to hospitals and
other providers have slowed the growth of Medicare Businesses face two constraints, however, in seeking to
spending (compared with projections under prior law) shift the costs of the penalty to workers. First, there is
and thus contributed to the slow rate of overall cost considerable evidence that employers refrain from cutting
growth in health care since the law’s enactment. Private their employees’ wages, even when unemployment is high
health care costs (as well as national health expenditures) (a phenomenon sometimes referred to as sticky wages).19
have grown more slowly in recent years as well, but ana- For that reason, some employers might leave wages
lysts differ about the shares of that slowdown that can be unchanged and instead employ a smaller workforce. That
attributed to the deep recession and weak recovery, to effect will probably dissipate entirely over several years for
provisions of the ACA, and to other changes within the most workers because companies that face the penalty can
health sector. Moreover, the overall influence of the ACA restrain wage growth until workers have absorbed the cost
on the cost of employment-based coverage is difficult to of the penalty—thus gradually eliminating the negative
predict—in part because some provisions could either effect on labor demand that comes from sticky wages.
increase or decrease private-sector spending on health
care and in part because many provisions have not yet A second and more durable constraint is that businesses
been fully implemented or evaluated.18 Consequently, generally cannot reduce workers’ wages below the statu-
CBO has not attributed to the ACA any employment tory minimum wage.20 As a result, some employers will
effects stemming from slower growth of premiums in the respond to the penalty by hiring fewer people at or just
private sector. above the minimum wage—an effect that would be simi-
lar to the impact of raising the minimum wage for those
companies’ employees. Over time, as worker productivity
Effects of the ACA on the rises and inflation erodes the value of the minimum wage,
Demand for Labor that effect is projected to decline because wages for
The ACA also will affect employers’ demand for workers, fewer jobs will be constrained by the minimum wage.
mostly over the next few years, both by increasing labor The effect will not disappear completely over the next
costs through the employer penalty (which will reduce 10 years, however, because some wages are still projected
labor demand) and by boosting overall demand for goods to be constrained (that is, wages for some jobs will be at
and services (which will increase labor demand). or just above the minimum wage).
Effects of the Employer Penalty on the Businesses also may respond to the employer penalty by
Demand for Labor seeking to reduce or limit their full-time staffing and to
Beginning in 2015, employers of 50 or more full-time- hire more part-time employees. Those responses might
equivalent workers that do not offer health insurance occur because the employer penalty will apply only to
(or that offer health insurance that does not meet certain businesses with 50 or more full-time-equivalent employ-
criteria) will generally pay a penalty. That penalty will ees, and employers will be charged only for each full-time
initially reduce employers’ demand for labor and thereby employee (not counting the first 30 employees). People
tend to lower employment. Over time, CBO expects, the are generally considered full time under the ACA if
penalty will be borne primarily by workers in the form of they work 30 hours or more per week, on average, so
reduced wages or other compensation, at which point the
penalty will have little effect on labor demand but will 19. See, for example, Peter Gottschalk, “Downward Nominal Wage
Flexibility: Real or Measurement Error?” Review of Economics
and Statistics, vol. 87, no. 3 (August 2005), pp. 556–568,
18. Before the ACA was enacted, CBO estimated that the provisions
http://tinyurl.com/k9bcxss; and Alessandro Brattieri, Susanto
of a similar proposal might cause a small increase or decrease in
Basu, and Peter Gottschalk, Some Evidence on the Importance
premiums for employment-based coverage, although that analysis
of Sticky Wages, Working Paper 16130 (National Bureau of
did not take into account the effects of the excise tax on certain
Economic Research, June 2010), www.nber.org/papers/w16130.
high-cost employment-based plans. See Congressional Budget
Office, An Analysis of Health Insurance Premiums Under the Patient 20. As of January 2014, the federal minimum wage was $7.25 per
Protection and Affordable Care Act (November 2009), hour. Roughly half of all workers, however, live in states or
www.cbo.gov/publication/41792. communities where the minimum wage is higher.
CBOAPPENDIX C THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 125
employers have an incentive, for example, to shift from to delay hiring. However, those effects are difficult to
hiring a single 40-hour, full-time employee to hiring two, quantify separately from other developments in the labor
20-hour part-time employees to avoid bearing the costs of market, and possible effects on the demand for labor
the penalty. through such channels have not been incorporated into
CBO’s estimates of the ACA’s impact.
Such a change might or might not, on its own, reduce
the total number of hours worked. In the example just Effects of Changes in the Demand for
offered, the total amount of work is unaffected by the Goods and Services on the Demand for Labor
changes. Moreover, adjustments of that sort can take CBO estimates that, over the next few years, the various
time and be quite costly—in particular, because of provisions of the ACA that affect federal revenues and
the time and costs that arise in dismissing full-time work- outlays will increase demand for goods and services, on
ers (which may involve the loss of workers with valuable net. Most important, the expansion of Medicaid coverage
job-specific skills); the time and costs associated with hir- and the provision of exchange subsidies (and the resulting
ing new part-time workers (including the effort spent on rise in health insurance coverage) will not only stimulate
interviewing and training); and, perhaps most important, greater demand for health care services but also allow
the time and costs of changing work processes to accom- lower-income households that gain subsidized coverage
modate a larger number of employees working shorter to increase their spending on other goods and services—
and different schedules. The extent to which people thereby raising overall demand in the economy. A partial
would be willing to work at more than one part-time offset will come from the increased taxes and reductions
job instead of a single full-time job is unclear as well; in Medicare’s payments to health care providers that are
although hourly wages for full-time jobs might be lower included in the ACA to offset the costs of the coverage
than those for part-time jobs (once wages adjust to the expansion.
penalty), workers also would incur additional costs
associated with holding more than one job at a time. On balance, CBO estimates that the ACA will boost
overall demand for goods and services over the next few
In CBO’s judgment, there is no compelling evidence years because the people who will benefit from the expan-
that part-time employment has increased as a result of sion of Medicaid and from access to the exchange subsi-
the ACA. On the one hand, there have been anecdotal dies are predominantly in lower-income households and
reports of firms responding to the employer penalty by thus are likely to spend a considerable fraction of their
limiting workers’ hours, and the share of workers in part- additional resources on goods and services—whereas
time jobs has declined relatively slowly since the end of people who will pay the higher taxes are predominantly
the recent recession. On the other hand, the share of in higher-income households and are likely to change
workers in part-time jobs generally declines slowly after their spending to a lesser degree. Similarly, reduced pay-
recessions, so whether that share would have declined ments under Medicare to hospitals and other providers
more quickly during the past few years in the absence of will lessen their income or profits, but those changes are
the ACA is difficult to determine.21 In any event, because likely to decrease demand by a relatively small amount.
the employer penalty will not take effect until 2015,
the current lack of direct evidence may not be very The net increase in demand for goods and services will in
informative about the ultimate effects of the ACA. turn boost demand for labor over the next few years,
CBO estimates.22 Those effects on labor demand tend to
More generally, some employers have expressed doubts be especially strong under conditions such as those now
about whether and how the provisions of the ACA will prevailing in the United States, where output is so far
unfold. Uncertainty in several areas—including the below its maximum sustainable level that the Federal
timing and sequence of policy changes and imple- Reserve has kept short-term interest rates near zero for
mentation procedures and their effects on health insur- several years and probably would not adjust those rates to
ance premiums and workers’ demand for health
insurance—probably has encouraged some employers
22. For further discussion of CBO’s analysis of the economic effects of
budgetary policies, see Congressional Budget Office, Economic
21. See Congressional Budget Office, The Slow Recovery of the Labor Effects of Policies Contributing to Fiscal Tightening in 2013
Market (February 2014), www.cbo.gov/publication/45011. (November 2012), pp. 2–5, www.cbo.gov/publication/43694.
CBO126 THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 FEBRUARY 2014
offset the effects of changes in federal spending and Once that occurs, the net decline in the amount of labor
taxes. Over time, however, those effects are expected to that workers choose to supply because of the ACA will be
dissipate as overall economic output moves back toward fully reflected in a decline in total employment and hours
its maximum sustainable level. worked relative to what would otherwise occur.
Why Short-Term Effects Will Be Differences From CBO’s Previous
Smaller Than Longer-Term Effects Estimates of the ACA’s Effects on
CBO estimates that the reduction in the use of labor that Labor Markets
is attributable to the ACA will be smaller between 2014 CBO’s estimate that the ACA will reduce aggregate labor
and 2016 than it will be between 2017 and 2024. That compensation in the economy by about 1 percent over
difference is a result of three factors in particular—two the 2017–2024 period—compared with what would
that reflect smaller negative effects on the supply of labor have occurred in the absence of the act—is substantially
and one that reflects a more positive effect on the demand
larger than the estimate the agency issued in August
for labor:
2010.23 At that time, CBO estimated that, once it was
fully implemented, the ACA would reduce the use of
The number of people who will receive exchange
labor by about one-half of a percent. That measure
subsidies—and who thus will face an implicit tax from
the phaseout of those subsidies that discourages them of labor use was calculated in dollar terms, representing
from working—will be smaller initially than it will be the change in aggregate labor compensation that would
in later years. The number of enrollees (workers and result. Thus it can be compared with the reduction in
their dependents) purchasing their own coverage aggregate compensation that CBO now estimates to
through the exchanges is projected to rise from about result from the act (rather than with the projected decline
6 million in 2014 to about 25 million in 2017 and in the number of hours worked).
later years, and most of those enrollees will receive
subsidies. Although the number of people who will be The increase in that estimate primarily reflects three
eligible for exchange subsidies is similar from year to factors:
year, workers who are eligible but do not enroll may
The revised estimate is based on a more detailed
either be unaware of their eligibility or be unaffected
analysis of the ACA that incorporates additional
by it and thus are unlikely to change their supply of
labor in response to the availability of those subsidies. channels through which that law will affect labor
supply. In particular, CBO’s 2010 estimate did not
CBO anticipates that the unemployment rate will include an effect on labor supply from the employer
remain high for the next few years. If changes in penalty and the resulting reduction in wages (as the
incentives lead some workers to reduce the amount costs of that penalty are passed on to workers), and it
of hours they want to work or to leave the labor did not include an effect from encouraging part-year
force altogether, many unemployed workers will be workers to delay returning to work in order to retain
available to take those jobs—so the effect on overall their insurance subsidies.
employment of reductions in labor supply will be
greatly dampened. CBO has analyzed the findings of several studies
published since 2010 concerning the impact of
The expanded federal subsidies for health insurance provisions of the ACA (or similar policy initiatives) on
will stimulate demand for goods and services, and that labor markets. In particular, studies of past expansions
effect will mostly occur over the next few years. That or contractions in Medicaid eligibility for childless
increase in demand will induce some employers to hire adults have pointed to a larger effect on labor supply
more workers or to increase their employees’ hours than CBO had estimated previously.
during that period.
23. See Congressional Budget Office, The Budget and Economic
CBO anticipates that output will return nearly to its Outlook: An Update (August 2010), Box 2-1, www.cbo.gov/
maximum sustainable level in 2017 (see Chapter 2). publication/21670.
CBOAPPENDIX C THE BUDGET AND ECONOMIC OUTLOOK: 2014 TO 2024 127
CBO made an upward revision in its estimates of the economy from about 0.5 percent to about 1 percent.
impact that changes in after-tax wages have on labor Second, CBO has increased its estimate of the effect of a
supply, reflecting a broad review of the tax literature given reduction in aggregate compensation under the
that has informed several of CBO’s estimates and ACA on hours worked. CBO’s earlier estimate was based
analyses.24 on a simplifying assumption that affected workers would
have average earnings—in which case the percentage
CBO’s updated estimate of the decrease in hours worked reductions in compensation and hours worked would be
translates to a reduction in full-time-equivalent employ- roughly the same. However, people whose employment
ment of about 2.0 million in 2017, rising to about or hours worked will be most affected by the ACA are
2.5 million in 2024, compared with what would have
expected to have below-average earnings because the
occurred in the absence of the ACA. Previously, the
effects of the subsidies that are available through
agency estimated that if the ACA did not affect the aver-
exchanges and of expanded Medicaid eligibility on the
age number of hours worked per employed person, it
amount of labor supplied by lower-income people are
would reduce household employment in 2021 by about
800,000.25 By way of comparison, CBO’s current esti- likely to be greater than the effects of increased taxes
mate for 2021 is a reduction in full-time-equivalent on the amount of labor supplied by higher-income
employment of about 2.3 million. people. According to CBO’s more detailed analysis, the
1 percent reduction in aggregate compensation that will
The current estimate of the ACA’s impact on hours occur as a result of the ACA corresponds to a reduction of
worked and full-time-equivalent employment is consider- about 1.5 percent to 2.0 percent in hours worked.
ably higher for two significant reasons.26 First, as
described above, CBO has boosted its estimate of the The reduction in full-time-equivalent employment that
ACA’s effect on aggregate labor compensation in the CBO expects will arise from the ACA includes some
people choosing not to work at all and other people
24. See Congressional Budget Office, How the Supply of Labor choosing to work fewer hours than they would have in
Responds to Changes in Fiscal Policy (October 2012), www.cbo.gov/ the absence of the law; however, CBO has not tried to
publication/43674. quantify those two components of the overall effect.
25. See testimony of Douglas W. Elmendorf, Director, Congressional Because some people will reduce the amount of hours
Budget Office, before the Subcommittee on Health of the House they work rather than stopping work altogether, the
Energy and Commerce Committee, CBO’s Analysis of the Major number who will choose to leave employment because of
Health Care Legislation Enacted in 2010 (March 30, 2011),
pp. 31–33, www.cbo.gov/publication/22077.
the ACA in 2024 is likely to be substantially less than
2.5 million. At the same time, more than 2.5 million
26. The estimates also differ in that the first estimate was presented
people are likely to reduce the amount of labor they
in terms of household employment and the current estimate is
presented in terms of full-time-equivalent employment. However, choose to supply to some degree because of the ACA,
that difference is relatively small when comparing CBO’s previous even though many of them will not leave the labor force
estimate with the current one. entirely.
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